No activist investor may be more famous for shaking up major companies than Elliott Management. Earlier this year, for example, pressure from the hedge fund forced Starbucks to oust its CEO and replace him with Chipotle chief executive Brian Niccol. Even by the standards of Elliott, though, experts in corporate governance say what the fund has set in motion at Southwest Airlines is remarkable.
Earlier this month, chairman Gary Kelly told shareholders he would retire next year, with six other board members voluntarily stepping down in November. The news came a day after Kelly and two other board members had met with the hedge fund.
Elliott, which manages roughly $70 billion in assets, celebrated what it described as the resignation of seven directors as “unprecedented.” Michael Useem, professor emeritus of management at the University of Pennsylvania’s Wharton School, agreed.
“It’s pretty drastic,” he recently told Fortune, “even if Southwest says it’s doing it on its own.”
Elliott isn’t done yet. On Tuesday, the hedge fund said it would call a special meeting “as soon as next week” as it still looks to oust CEO Robert Jordan and calls for a greater strategic shift. Elliott announced in June it had built an 11% stake in the Dallas-based airline, above the 10% threshold needed to make such a request, worth almost $2 billion.
In July, Southwest announced it will replace its famous open-seating policy and begin charging for premium seating, which has become a major revenue stream for rivals. The airline expanded on those changes in a plan presented at its investor day Thursday and said the three-year overhaul would generate about $4 billion in incremental earnings before interest and taxes (EBIT) by 2027.
“We’re now ushering in a new era at Southwest, moving swiftly and deliberately to transform the company,” Jordan said in a statement.
Southwest’s board authorized $2.5 billion in share buybacks Thursday to help fend off Elliott's pressure. The airline also announced former Spirit Airlines CEO Bob Fornaro would join the board, a move that could be a nod to Elliott’s aspirations to mold Southwest into a similar ultra-low-cost carrier (Southwest also acquired AirTran when Fornaro was CEO in 2011). Southwest has said it is willing to consider filling three board seats with candidates put forward by the hedge fund.
After the investor day, Elliott accused Jordan of earlier dismissing many aspects of the new plan. It also criticized the airline for waiting to implement the seating changes until 2026, claiming rivals have accomplished such changes in much shorter time frames.
“This is yet another long-dated promise through which Mr. Jordan is playing for time, not success, but he is playing with shareholders' money,” partner John Pike and portfolio manager Bobby Xu said in a statement.
Given how the airline’s shares have floundered in recent years, both Useem and John Busenbark, associate professor of management and organization at the University of Notre Dame’s Mendoza College of Business, find Elliott’s pressure unsurprising.
Even after jumping over 10% Thursday morning, the stock remains down over 50% from its post-pandemic high in April 2021 and more than 12% below where it sat a decade ago. The S&P 500, meanwhile, has nearly tripled in the past 10 years. It's been a tough period for airline stocks overall, though, with the S&P's passenger airline index falling roughly 9% in that span.
View this interactive chart on Fortune.com
Will Elliott's pressure benefit shareholders?
With almost half of Southwest’s 15 directors already scheduled to depart, Useem could recall few instances of greater turnover resulting from activist pressure. In 2014, he noted, hedge fund Starboard Value managed to force out all 12 directors of Darden Restaurants, the parent company of chains such as Olive Garden and Ruth Chris Steak House.
While it’s plausible the massive turnover will spark meaningful change, Busenbark said, many board members may have simply left to avoid a looming battle. Research suggests most board members enjoy the “quiet life” afforded by corporate directorships, he noted, and are disinterested in a combative environment.
“In fact, most board meetings unfold without literally any dissension,” he wrote in an email to Fortune, “so many directors are not equipped to grapple with being embroiled in this type of ire.”
Nonetheless, the departure of Kelly, who served as the airline’s CEO from 2004-22, could be a seminal moment for the company. It’s common for a former chief executive to remain as board chair for a couple years, Busenbark said, but the arrangement didn't help counter Elliott's arguments that Southwest had failed to evolve. Useem agreed that such a situation can be a “red flag.”
“You don't want the current CEO hemmed in by anybody who's sitting there in the boardroom fond of his or her policies that worked five years ago,” he said, “but maybe don't work so well now.”
In his letter earlier this month, Kelly held that Jordan—who joined Southwest in 1988—remained the person best fit to lead the airline's transformation.
Busenbark said activists force management to acquiesce to their demands about two-thirds of the time and typically increase performance. However, when firms become consumed with pacifying activists, he said, rivals can also take notice and achieve even greater performance gains than the company targeted by the campaign.
Regardless, shareholders will hope the fight for the airline’s soul somehow yields better returns.
